A significant increase in cheap imports from China could push UK inflation lower and lead to further interest rate reductions, according to a key Bank of England policymaker.
Trade Diversion to Ease Inflation Pressure
Alan Taylor, an external member of the Bank's Monetary Policy Committee (MPC), stated that goods no longer being exported to the United States due to former President Trump's tariff war are being redirected to other markets, including the UK and European Union. Speaking at the National University of Singapore on 14 January 2026, Taylor, regarded as the committee's most dovish voice, warned this influx could reduce inflation over the coming year.
He pointed to clear evidence of intensifying trade diversion, which he believes might mitigate the "risk of a major decline in world trade". Taylor described the Bank's own forecast—that this effect could lower UK inflation by around 0.2 percentage points over the next two years—as "conservative", predicting actual headline inflation would fall short of the Bank's projections.
Path to Faster Normalisation of Monetary Policy
Taylor also factored in expected Budget measures on energy subsidies, anticipated to cut headline inflation by approximately 0.5 percentage points this year. Combined, these forces could see inflation hit the Bank's 2 per cent target by mid-year, rather than in 2027.
"I see this as sustainable, given cooling wage growth, and I now therefore expect monetary policy to normalise at neutral sooner rather than later, as I said in the December minutes," Taylor explained. He added, "Interest rates should continue on a downward path, that is if my outlook continues to match up with the data, as it has done over the past year."
Contrasting Views and Global Trade Shifts
These remarks present a contrast to recent official Bank communications, where policymakers indicated global events had not greatly influenced their thinking on rates following April's Liberation Day. Taylor's speech coincided with China reporting a larger-than-expected trade surplus for December 2025. Exports rose by 6.6 per cent in dollar terms year-on-year, bringing the surplus to $1.2 trillion (£890bn), demonstrating resilience to US tariffs.
The data revealed a dramatic fall in Chinese exports to the US, countered by an 8.4 per cent increase in exports to the EU. However, China faces potential further US tariffs linked to its trading relationship with Iran, which could add to existing "reciprocal" and fentanyl-related rates.
